Investors Seeking Safe Income from Bonds Lose Out on Structured Notes

Retirees and other investors seeking safe, stable returns typically invest
in bonds. A bond is essentially a loan from an investor to a company or
government in exchange for a promise of repayment (the principal borrowed
plus a predetermined interest rate) on a set date (also know as the maturity date).
Investors generally view bonds as risk-free products offering a stable
return. Unfortunately, this has enabled unscrupulous brokers and sales
agents to mislead investors seeking safe income into purchasing complex
securities they don't understand.

84-year-old Leona Miller is one such investor. Two years ago, while in
the market for "safe and steady income from bonds," Miller was
persuaded by her broker to purchase a structured note paying 9% interest,
according to a September 22 Bloomberg article by Zeke Faux. Within 6 months
she had lost 30% of her $20,000 investment.

Structured notes are bonds bundled with
derivatives. Sales to investors like Miller have increased structured note offerings
58% over the previous year, according to the Bloomberg article. The low
rate for overnight loans between banks set by the Federal Reserve combined
with the complex nature of the notes has contributed to their rising popularity.

"Brokers are paid more to sell structured notes than some other financial
products because the securities aren't standardized, making it difficult
for buyers to shop around," said the managing director and co-founder
of the research firm Institutional Risk Analytics, Christopher Whalen,
to Bloomberg. Regulators and industry professionals see this as a problem.
Over the past year, the SEC has begun investigating the sale of
structured products, particularly to individual investors.

"We're concerned about the sale of complex structured notes to
retail customers because people don't always understand the risks
they're exposed to," said Kenneth Lench, head of the SEC's
Structured and New Products unit, in the article. Miller, whose Wachovia
Corp. broker sold her the structured product, is now involved in an arbitration
proceeding with Wells Fargo & Co. Wells Fargo acquired Wachovia in 2008.